(Bloomberg) — Revived prospects for an increase in U.S. interest rates this year rippled across financial markets, as the best monthly rally in equities since 2011 stalled and the strongest dollar in two months dented commodities and emerging assets.
The Standard & Poor’s 500 Index slipped from a two-month high, paring an October rally that’s added more than $1.5 trillion to U.S. equity values. Emerging-market stocks headed for their biggest drop of the month, while commodities from copper to gold sank more than 1 percent. Treasuries resumed losses, sending yields on 10-year notes to 2.13 percent. The dollar held at the strongest since August.
“Hot money that flowed in, as some investors tried to trade the Fed, is now flowing out quickly,” said Nathan Griffiths, who manages about $800 million in emerging-market stocks at NN Investment Partners in The Hague. “There is a very minute focus on when the Fed raises its reference rate precisely because growth fundamentals are so weak, particularly in emerging markets.”
Odds the Fed will move on rates at their next meeting jumped to 50 percent from around 32 percent a week ago, based on futures prices, after officials signaled they’re prepared to tighten as threats to U.S. growth from turbulent financial markets wane. While risks to expansion remain, with data showing a slowdown in American growth last quarter, central banks from Asia to Europe have indicated they are ready to maintain or boost stimulus.
The S&P 500 slipped 0.3 percent at 9:31 a.m. in New York, after surging 1.2 percent yesterday to put its October gain at 8.9 percent. The Nasdaq 100 Index fell after closing yesterday within a point of its 15-year high set in July. The Russell 2000 index of small caps weakened following its best one-day rally this year.
“The rally off of the lows yesterday was a little bit overdone,” said Michael James, managing director of equity trading at Wedbush Securities Inc. in Los Angeles. “The door was left open for a rate hike in December, which is likely to lead to a much higher dollar. That won’t be a good read for anyone doing business internationally.”
The Stoxx Europe 600 Index slipped 0.1 percent, paring its October gain to 7.9 percent. Deutsche Bank AG lost as much as 6 percent on a third-quarter loss and plans to shrink its workforce by about 26,000 people by 2018. Barclays Plc dropped 5.3 percent after saying third-quarter profit fell 10 percent, missing estimates. Sanofi declined 5.2 percent after cutting its forecast for sales of diabetes therapies in the next three years.
Danone climbed as much as 3 percent and Mead Johnson Nutrition Co. jumped about 5 percent in early New York trading after the official Xinhua News Agency said China will allow all couples to have two children. The companies are both among the biggest suppliers of baby-formula in China.
The Fed’s statement Wednesday prompted the biggest jump in two-year Treasury yields since March. The rate added another two basis points to 0.72 percent today, the highest level in a month.
The extra yield investors demand to hold 30-year Treasuries instead of 5-year notes fell to about 140 basis points, the least in nearly two months, as the market adjusted expectations on interest rates.
German 10-year yields advanced four basis points, while rates on similar maturity U.K. gilts jumped seven basis points to 1.87 percent. Germany’s two-year yield was at minus 0.328 percent, after touching a record minus 0.355 percent on Wednesday.